Bad News in Carlsbad, New Mexico

Question: What’s blacker than Carlsbad Caverns in a power outage?

Answer: A house that burns down without an insurance policy!

In 1998, I sold a property in Carlsbad that had a couple of houses on a single lot. I made sure that the guy who bought the property from me had insurance, so that if there was a fire, the insurance company would replace the house. One of the houses was rented. The other house needed repairs to make it livable, a classic “fixer upper”. The income from rental house on the property more than made the mortgage payment, and once the second house was fixed, there would be excellent cash flow. It looked like a great investment for the buyer (who was a licensed contractor), and a good contract for me. For more than a year after closing, the payments came in like clockwork. Then they quit. I called the buyer, but his phone had been disconnected. I wrote a courtesy letter, but the letter was returned. When the payment was 30 days late, I drove over to Carlsbad. When I arrived, I found a blackened building that used to be a good rental. I stopped by the Carlsbad Fire Department to find out what happened. They told me that the tenant in the rental had dropped a cigarette or some other burning item onto the bed, which set the house on fire. By the time the fire department arrived at the scene, the house was gone.

I looked up the name of the insurance company, and called them to see if a claim had been filed. They told me that the insurance had expired because the buyer had not paid the premium. That was a complete shock because I never received a Notice of Cancellation from the insurance company. I assumed insurance was in full force. The result: I lost about $25,000 in damages. The buyer was nowhere to be found, leaving me with the charred remains of a house to cleanup.

Do you have a current insurance policy in your file? Go get your file now. What’s the expiration date? Are you listed as a Mortgagee? For almost a decade, I’ve been buying New Mexico contracts, New Mexico Notes, and other forms of privately held mortgages, and I’ve found that more than half of all “note holders” do not have insurance on the property they sold, even though the contract requires insurance.

Lack of insurance can endanger your investment, so you need to make sure insurance is in full force. It so happens that unpaid property taxes can endanger your investment also. Most New Mexico Real Estate Contracts and New Mexico privately held mortgages have two things in common: they require the purchaser to pay for both. The problem is that many people assume the buyer will comply with the terms of the contract. As the contract owner, you are responsible for making sure insurance and taxes are paid. The next two articles in this three part series discuss how to deal with these issues.